Copper now behaving as financial instrument, not a metal: BME

London (Platts)--12Jan2006

Copper is no longer behaving as an industrial raw material, but as a
financial instrument, Bloomsbury Minerals Economics said in a report on the
impact of commodity index funds on metal prices Thursday.

     "We think that it is pointless continuing to analyse copper prices as if
they were simply prices of an industrial raw material. For now, copper is
behaving essentially as a financial instrument," said BME analyst Peter
Hollands, adding that Commodity Index Fund buying was raising copper prices
above the level that would otherwise be seen.

     "Demand for metals futures is compounding the effect of market deficits
and low physical stocks. Copper price behavior has made a transition from
being primarily that of an industrial raw material to that of a financial
instrument," said Hollands.

     He said however, that the index fund demand for metals drives up prices
which attract money to the index funds which drives up prices--"It is a
bubble." "Life has become very dangerous indeed to the physical copper
industry," he warned. Hollands also noted the break-outs of actual price from
modeled physical-market fair value which have emerged in aluminium and zinc
during 2005 and in lead and nickel this month. "Commodity Index Fund
investments have had an equally dramatic effect on gold, by converting it from
a currency and real-interest-rate driven financial instrument to a Commodity
Index Fund-driven financial instrument, causing gold prices to correlate
positively with base metals prices," he noted.

     Hollands said Commodity Index Fund investments were expected to rise from
around $80-bil now to $105-115-bil by the end of 2006 and $140-150-bil by the
end of 2007, provided that a major bear market in commodities has not begun by
then. "Some of the newer funds are more metals intensive. If Index Fund
investments do grow like that, then index fund buying could add the equivalent
of 350,000-525,000mt of demand for aluminium futures, 180,000-270,000mt to
demand for copper futures, 100,000mt-150,000mt to demand for zinc futures,
70,000-105,000mt to demand for lead futures and 100,000-15,000mt to demand for
nickel futures, in both 2006 and 2007," he said. Hollands noted that the
impact on price may well be most extreme in metals where there are also
deficits in the physical market and very low stocks.

     "The end of a fundamentally-driven bull market in commodities will most
likely bring the inflow of investment money to a halt, but may not prompt a
great deal of dis-investment. The pensions industry seems to have accepted a
long-term role for commodities holdings for the purposes of diversification,
inflation hedge, offsetting weak developed world currencies, gaining exposure
to emerging market growth," said Hollands.

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